Welltower Inc (WELL) — Q1 2023 Earnings Call Transcript

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the Company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the Company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone. I'll review our first quarter results and describe high-level business trends and our capital allocation priorities. John will provide an update on the performance of our senior housing operating and outpatient medical portfolio. Tim will walk you through triple-net businesses, balance sheet highlights, and revised guidance. Nikhil is also on the call to answer questions. We're pleased to report another strong quarter with results that exceeded our expectations. Our strong performance was once again driven by outsized growth in our senior housing operating portfolio. We generated 23.4% same-store NOI growth, with both revenue and expense trends continuing to move in the right direction. In fact, we produced our fifth consecutive quarter of double-digit organic revenue growth on the back of strong pricing power and occupancy build, with each coming slightly better than expected. But perhaps equally, if not more encouraging, is the margin expansion story, which has been driven by a significant improvement on the cost side. While we generated strong revenue growth in 2020, these gains were largely offset by pressure across the expense tax, which ultimately resulted in a lost year in terms of partial growth. We are delighted by the progress made on various expense items, but particularly pleased by the sharp decline in agency labor or temporary staffing across the portfolio. Over the past few quarters, we have noted the headway our operating partners have made in net hiring, as employment rates have been weakening. This has ultimately translated into a meaningful reduction of prohibitively expensive temporary staffing, with costs declining over 50% versus the first quarter of last year. Though we still have a long way to go to eradicate this problem, which we largely attribute to committee leadership challenges, we believe that this trend, along with strong pricing power, will continue to be a tailwind for further margin expansion. From a product and geographic standpoint, while assisted living continued to outperform independent living, IL pricing is starting to strengthen. This is reflected in our Canadian portfolio, which is finally rebounding after a disappointing couple of years. We have seen standout performance from our operating partner Cogir, which has returned to almost 40% margin for the first time since COVID. We're grateful to our partner Mathieu Duguay and his team for their hard work and dedication. Sticking with that international team, our UK portfolio continues to produce strong revenue growth, and we're starting to see some green shoots on the cost side. During our call, I expressed my enthusiasm around the appointment of Lorna Rose as the CEO of the largest UK operator, Avery. Lorna is already making a significant impact with strong commercial acumen and impeccable leadership skills. We expect our UK portfolio to be a strong source of growth as we look at 2024 and beyond. Returning to the U.S., our largest operator Sunrise continues to produce strong top and bottom line results. There is meaningful embedded upside to this incredibly well-located and virtually impossible to replicate portfolio, which sits at mid-70s occupancy today. Also, during our last call, I mentioned that we expect meaningful step function growth from a large regionally concentrated portfolio of StoryPoint. I'm pleased to report that Dan and his team have started the year off with a bang, as their no excuse culture and relentless focus on performance are paying off significantly. Last but not least, Oakmont. A year and a half ago, we moved six well-located California properties to Oakmont, and at that time, Courtney Siegel, Oakmont’s CEO, made me a promise that our team would lease up this portfolio in two years. I'm pleased to report that the portfolio today sits at 86% occupancy, while NOI has gone up 13 times since then. Courtney has set a simple performance-driven culture at Oakmont. If you're not 95% occupied, you're not performing. I'm confident that I will soon be able to report to you that this portfolio has reached 90 plus percent occupancy level. Pursuit of higher standards is a prerequisite for high performance. Last year, I described to you that we, as capital allocators, strive to create partial value by compounding over a long period of time. By doing what's right in the long-term for our continuing shareholders may result in short-term pain. Our proactive portfolio management efforts, which include the transition of properties to the strongest operators, is an example of this philosophy. I encourage you to look at the case studies within our business update presentation for more details on Oakmont's success and the other key operators, including Peace Capital, which has created substantial value for our shareholders following the transition of a portfolio of skilled nursing facilities two years ago. By operating these facilities more efficiently from an expense perspective while increasing quality mix, Peace has been able to improve EBITDAR by more than 75% relative to the pre-COVID levels. This point is further underscored by our COVID class of acquisitions and our further efforts to transition other assets over the last few years. We're just beginning to capture significant embedded NOI from these properties as they return to their pre-COVID NOI levels and higher. In fact, we have achieved 20% of that incremental NOI in the past quarter alone. Shifting to the operating platform and asset management initiatives. As you have come to know, at Welltower, we vehemently reject mediocrity and are in relentless pursuit of high standards. We continue to believe that there's an opportunity to recognize meaningful cash flow from our own portfolio as we optimize location, product, price point, and operators using our data analytics platform, Alpha. To further add to this multi-dimensional optimization problem using machine learning, our operating platform initiatives are now becoming more tangible, moving from drawing boards to pilots. While a few weeks don't make a trend, we are optimistic that John and his team are on the verge of some real creative breakthroughs more on that in the incoming quarters. In terms of recent operating conditions, while I don't like to focus on short-term trends, I want to mention the consistent rise in demand for our seniors’ product in Q1. Total volumes are up roughly 20% in the quarter, partially attributed to an easier comparison period last year due to the Omicron variant, but also because of strong organic demand as we enter another year of significant growth of the 80-plus population. Lease and tours have picked up further in April. While we remain confident in the prospects of the business, I'd be remiss not to acknowledge the rising macroeconomic uncertainty as we approach the summer and fall leasing season. We're encouraged by what we're seeing so far, which admittedly is also the seasonally slowest point in the year. Therefore, we need to see what the market gives us during the all-important upcoming leasing season. The need-driven nature of our product gives me hope that we will outperform the majority of the asset classes, not just real estate, but it is also important for you to understand that we have no delusions of certainty. Moving to capital allocation, since our last call, the U.S. banking sector has started to show some significant signs of strain, resulting in material declining trade flow in the economy. While no one is rooting for macroeconomic uncertainty, the current backdrop has certainly created a further expansion to our already attractive set of capital deployment opportunities. We remain disciplined and will not risk the enterprise that we built with blood, sweat, and tears, but we remain optimistic that we'll be able to grow our portfolio with well-located assets at highly favorable bases and in-place cash flow. To illustrate that point further, we acquired $529 million of assets during the first quarter at a great basis and in-place cash flow. The K Street medical office building that we acquired in D.C. perhaps tells you how favorable the investment environment has become. We continue to see underwriting standards starting to change meaningfully, leverage levels decline, and banks are now requiring more commercial deposits and more recourse. As a low-leveraged buyer, this backdrop is very beneficial for us. Our pipeline today is robust with opportunities to deploy capital across senior housing in all three countries, outpatient medical in the U.S., and data opportunities on the skilled side. Our team remains active and yet highly disciplined and price-conscious as always. From a balance sheet standpoint, I wanted to quickly highlight the continued progress we made in terms of leverage and liquidity under Tim's leadership. He will get into more details. But I'm very pleased with the significant deleveraging that we have achieved in the past year with net debt to EBITDA falling almost a turn to 6.3 with further organic deleveraging going forward. And our ability to source over $1 billion of capital this year in the midst of a very challenging capital markets environment is a testament to the confidence entrusted in us by the banking community, the lenders, our investors, and our other partners. With approximately $700 million of cash on the books and an undrawn line of credit, we are not only positioned to endure further capital market volatility, but also to deploy capital as opportunities arise. To summarize, our optimism regarding the long-term growth trajectory of the business remains firmly intact. Top-line growth remains strong, expenses are moderating, and our external growth opportunities continue to expand. All the while, John and his team are making progress in turning our vision of creating a world-class operating platform into a reality. And with that, I will turn it over to him for an update on the operational elements of the business and build out of the platform.

Thank you, Shankh. Another great quarter, 11% same-store NOI growth over the prior year's quarter led by the senior housing operating portfolio with 23.4% year-over-year growth. These results speak for themselves. They're great. So, I'll provide limited color this quarter. The medical office portfolio's first quarter same store NOI growth was 1.6% over the prior year's quarter. As our guidance outlines, we expect the MOB portfolio to deliver between 2% and 3% same-store NOI growth in 2023. Therefore, we expect the remaining three quarters to be well above the first quarter number. Same-store occupancy was 94.9%, while retention remains extremely strong across the portfolio at 91.4%. The 23.4% first quarter NOI increase in our senior housing operating portfolio was a function of the 10% revenue growth and continued expense control for the period. I want to remind everyone that last quarter's revenue growth was driven in part by an operator pulling forward rental increases. Excluding that specific operator, revenue growth in Q1 would have been 10.8%, a 130 basis point increase over the growth for Q4 2022 for the comparable portfolio. All three of our regions continued to show strong revenue growth, starting with Canada at 7.7%, and the U.S. and UK growing 9.3% and 17.4%, respectively. Revenue growth for the quarter was driven by a 240 basis point increase in average occupancy and another quarter of healthy pricing power with RevPOR growth of 6.8%. The 10 basis point increase in sequential occupancy during the first quarter period that has historically seen an occupancy decline due to seasonal factors reflects the continued increased demand for senior housing as we move into the all-important spring and summer leasing season. Turning to expenses, agency use continues to decline, leading to a 53% expense decrease year-over-year for the same store portfolio in the first quarter of 2023. Welltower's continued aggressive asset management is keeping expenses in check, enabling margin expansion. During the first quarter, the operating margin expanded 240 basis points over the prior year's quarter. Regarding our operating platform, I'm very pleased with the progress the teams have made. We are executing rapidly as planned. As many of you know, I'm somewhat secretive about the details of our platform for proprietary reasons. However, I will say that one of the challenges our operators in the pilot are having is keeping up with the increased qualified leads, which is a very good problem to have. We're at the very beginning of this process but all lights are green at this time, and I'm very excited about the future. I'm grateful for the diversity of operational experience, engagement, and enthusiasm of those operators who understand how the platform will transform the business, leading to consolidation and great success for the operators who leverage our best-in-class platform to improve the delivery of service to our customers, the quality of life of the employees, and returns for our owners. I will now turn the call over to Tim.

Thank you, John. My comments today will focus on our first quarter 2023 results, performance of our triple-net investment segments in the quarter, our capital activity, our balance sheet and liquidity update, and finally our updated full-year 2023 outlook. Welltower reported first quarter net income attributable to common stockholders of $0.05 per diluted share, and normalized funds from operations of $0.85 per diluted share, representing a 4% year-over-year growth and 13% growth after adjusting for the year-over-year impact from a stronger dollar and higher base rates on floating rate debt. We also reported total portfolio same-store NOI growth of 11% year-over-year. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported a quarter in arrears, so these statistics reflect the trailing 12 months ending 12/31/2022. In our senior housing triple-net portfolio, same-store NOI increased 0.2% year-over-year, and trailing 12-month EBITDAR coverage is 0.86 times in the quarter. Next same-store NOI on our long-term post-acute portfolio grew 4.2% year-over-year, and trailing 12-month EBITDAR coverage was 1.33 times. Turning to capital market activity. In the quarter, we raised $413 million through our ATM program, which helped fund accretive investment activity during the quarter and maintain debt to EBITDA at 6.31 times at quarter end, a substantial decrease from 7.1 times at 3/31/2022. In March, we swapped $350 million of our $1 billion 2027 floating rate term loan to a fixed rate of 5.335% through March of '24, bringing floating rate debt to 13.6% of total debt and just 4% of consolidated enterprise value as of quarter end. We ended the quarter with $639 million of cash, full capacity under our $4 billion revolving line of credit, and $393 million of expected proceeds from near-term dispositions and loan pay-downs, representing $5 billion in near-term available liquidity. Over the last 12 months, we've seen leverage meaningfully improve from its post-COVID peak, reaching the first quarter of 2022. As our senior housing operating NOI has started to recover, we have experienced beginning stages of cash flow growth driven deleveraging. We have amplified this organic leverage reduction with a disciplined approach to the capitalization of our external growth pipeline. The result of this approach is a balance sheet that in its current form is poised to be substantially lower leveraged than it was pre-COVID as we continue to see the senior housing operating environment recover. Lastly, moving to our full-year guidance. Last night, we updated our previously issued full-year 2023 outlook, the net income attributable to common stockholders to a range of $0.57 to $0.72 per diluted share, and normalized FFO of $3.39 to $3.54 per diluted share, or $3.465 at the midpoint. Our updated normalized FFO guidance represents a $0.025 increase at the midpoint from our previously issued guidance. This increase in guidance is reflective of $0.02 of fundamental outperformance, mainly from our senior housing operating segment, roughly $0.005 of which is from subsidies received in Q1 and a $0.005 from investment activity completed in Q1. Underlying this FFO guidance is an increased estimate of total portfolio year-over-year same-store NOI growth of 9% to 13%, driven by sub-segment growth of outpatient medical 2% to 3%, long-term post-acute 3% to 4%, senior housing triple-net 1% to 3%, and finally increased senior housing operating growth of 17% to 24% year-over-year. The midpoint of which is driven by better than expected expense trends to start the year, along with year-over-year growth expectations of revenue, approximately 9.5%. Underlying this revenue growth is the expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth from approximately 6.3%. And with that, I'll hand the call back over to Shankh.

Thank you, Tim. While we're very pleased with our quarterly results and our improved outlook, it's a bittersweet moment for us in Toledo as we mourn the passing of George Chapman. George was the former Chairman and CEO of Health Care REIT, Welltower’s very sister company, and a gifted person and a visionary in the healthcare real estate space, and perhaps above all, an incredibly kind and generous individual. During his many years at Health Care REIT, George not only served as a leader of the company, but was also a mentor and teacher to numerous individuals across the real estate space. He was raised in the Toledo area and always sought opportunities to give back to the community, including his high schools in Miami, and through his service on various boards to strengthen the northeast Ohio region. We are deeply appreciative of all he has done for us, and he'll be missed dearly. Lastly, before we go into Q&A, I wanted to highlight a document which we posted on our website last evening, which was also part of our shareholder letter published a couple of weeks ago. This document contains a set of ground rules or shared principles, which form Welltower's philosophical foundation for long-term compounding through capital allocation, risk mitigation, and culture amongst other factors, and ultimately the most importantly, who we seek as our long-term investor partners as we execute our mission of delivering to them superior, absolute, and relative total shareholder returns. I will now open up the call for questions.

Hey, everybody. Good morning. Can you share your thoughts on further transitions and potential consolidation of operators within the portfolio? Because in your case studies, we were most impressed with Kisco. Are there opportunities to expand this relation from seven or eight communities, like you did with the Kensington? And look, we ask given all operators are not operationally equal. So, is there a plan or potential for further accretive transitions?

Kisco is one of our strongest operating partners, and we see significant growth opportunities with them. This could be through transition, acquisition, or development. They have performed exceptionally well, and we are actively having discussions about this. As I mentioned in last quarter’s call, we believe we've figured out a creative way to handle transitions. For example, last year, we announced a substantial acquisition with our partner, StoryPoint. The first set of properties from this acquisition closed in Q3. In this tranche, 18 properties were taken over from an existing operator. At the end of Q2, those properties had a 74% occupancy and around $6.4 million in annualized NOI. After nine months, by the end of March, occupancy increased to 92%, and NOI rose to $16.2 million. This demonstrates what a capable operator can achieve with focus. John and his team, along with our premium operating partners, who have successfully managed through the toughest times during COVID, have shown their ability to navigate these transitions creatively. We believe there are substantial opportunities to improve our portfolio by optimizing location, product, price point, and operator. Swagat and Kevin, along with their team, are continually working on these optimizations together with our top operating partners.

Question on labor for me. I can appreciate that Welltower, the operator base has made a lot of headway on improving labor sourcing methods across the portfolio and then the positive trends related to agency usage. So I'm curious, what does the training schedule look like for a new hire in a senior housing facility? And can you provide any color or number as to what turnover levels look like currently compared to, say, this time last year? And then what your expectations or goals are related to that turnover metric looking forward?

Yes, I’ll answer that. So, a couple of things there. One is, things are going fantastic. We've fundamentally changed how we looked at or how the operators look at that personnel and effectively created a hiring funnel to move people through that process. The training is dependent upon position, but can take from a few weeks to a couple of months in some jurisdictions, as far as certain requirements that are there. One of the things that I want to bring up, it’s pretty important, it's a subtle piece, but it's pretty important. We appreciate the agencies stepping in when necessary to provide some assistance, but it's obviously both disruptive and not very efficient. So, as we move forward and we reduce agency and create a group of steady long-term employees, that substantially improves the quality of life for our residents, and it improves our effectiveness and our efficiency. So, the benefits are not just reducing the expense; the benefits will come through via increased occupancy, increased RevPOR, et cetera. As far as for the turnover, the turnover at this point in time is going down. We have numerous initiatives to improve the quality of life for our employees as well. As I mentioned in the past, we are focused on that. We're looking through the lens of the employees. They are very hard-working people, and making sure that they have what they need really for the whole aspect of their employment. Whether it’d be things as simple as parking to break rooms to time off, et cetera, we've put a lot of effort into that. We continue to put effort into that. So that's a very positive area. Thank you for the question.

Shankh or Tim, I have a broad two-part question regarding investments. First, one of your peers faced some challenges with their debt investment and had to convert it. There are some headwinds involved. Could you provide some insight into your loan book, especially the investment you made with HC-One a couple of years ago? If I'm correct, it was over $700 million. I would like to understand the structuring, the timing of your underwriting, and perhaps an update on its status. Additionally, Shankh, you have a very unique relative cost of capital in a market where equity and debt are difficult to obtain and there is significant fear. Can you provide some general insights into where you see opportunities in terms of capital structure or types of properties? Thank you.

Let me try to address both of those questions, and Nikhil will jump in if I miss anything. Let's start with the second question first. We consistently look for opportunities when the market is uncertain. As I mentioned earlier, we have a significant actionable pipeline in senior housing across all three countries. This is the first time we are noticing opportunities not only in the U.S. but also in Canada and the UK. Therefore, we are very optimistic about senior housing prospects in these countries. We are identifying many small deals, focusing on individual purchases, specific assets, and small transactions, particularly in outpatient medical within the U.S. Additionally, we are seeing opportunities throughout the capital structure, especially in the debt segment of the skilled side of our business. This is where we are identifying potential opportunities. First question, regarding our debt book. We can categorize our debt book into three different segments. Before diving into that, I want to point out that the majority of these loans, about 80%, were originated after COVID. As we've discussed in previous calls, let me explain these three segments. The first segment is HC-One; if you have a specific question about it, I'll address that. The second segment involves our partnerships; as I mentioned before, these developments are arranged as a participating means. This represents the bulk of the loans. The average size of the loan is approximately $12 million. We are concentrating not only on debt but also on the last dollar basis of each bid, and in many cases, there may be an equity feature tied to that debt. Let's discuss them individually. We have mentioned the relative development pipeline, which is structured as a participating means, defining it as an equity-like structure. HC-One is a whole loan and a senior loan, which distinguishes it from many other offerings. It is not a mezzanine loan, and there is no senior loan in front of us; we are the senior loan. The last pound basis of this loan is £32,000 per debt, indicating how low-leveraged it is. Although we have no intention of taking it over, if we were to do so, there would be no senior loan ahead of us. This context underscores the last dollar basis and the values in the UK. More importantly, we have a significant amount of equity backing this loan in the form of warrants. Regarding the loan structure, we have pure debt along with a substantial amount of participating preferred and participating mezzanine debt. We are careful to engage in loans where the last dollar is beneficial to us. We hope that borrowers will perform well, and through the equity participation inherent in many of these loans, we will share in their success, not merely generate returns on our capital. I hope that clarifies things for you.

I'll just quickly add on the two related projects that have delivered. The New York senior housing opened in January of this year, and after four months, occupancy is exceeding our initial expectations for the end of the first year. The San Francisco project, which has been open for about a year, is also performing better than anticipated.

And rates are substantial above...

Shankh, you made the comment recently that if John and team are successful with their initiatives that the pace of improvement in expense growth will intensify from here. I'm just curious if some of the early operating initiatives you're currently working on were flowing through the cost structure of the business in recent quarters, how much lower would expense per occupied room growth been relative to the 3.5% reported growth in recent quarters?

I will address your question in two parts. First, regarding the asset management initiative, which John and his team are working on, we are seeing the impact of replacing agency labor with permanent employees. John also mentioned several other initiatives aimed at attracting and retaining talent, which should further decrease that number. The second part of your question pertains to the operating platform. Currently, John is focused on revenue growth, and as I noted in my prepared remarks, we've moved several initiatives from the planning stage to pilot projects, showing significant success in generating leads and other outcomes that we are not yet ready to discuss, affecting the top line rather than expenses at this moment. He will address expenses later, but right now, he is concentrating on revenue growth.

I would like to discuss capital allocation, specifically regarding the MOB acquisitions. It appears to be a strategic move. I recall that you were selling MOBs back in the summer of 2020 when there was demand. Could you provide more details about the initial yields? The occupancy rate for the K Street property seems to be on the lower side. Nikhil, in your assessment, are you projecting a stabilized occupancy in the high-80s or low-90s? Additionally, Shankh, reflecting on your third-quarter remarks about the five sources of capital, is there one source—whether debt, equity, or asset sales—that currently appears more appealing?

Nikhil will review the MOB acquisitions we made this quarter. To address some of your other questions, we have utilized three of our five sources of capital this quarter. We have engaged in public equity, private equity, and asset sales to raise capital, which have yielded very favorable returns. You can see examples on slide 12 in our case studies about how we maximized value in those transactions. We still have some involvement remaining in that deal. The other source was secured debt. When considering our capital options, remember it’s not just about public equity and public debt, which have been great for us, but also private capital sources like joint ventures, asset sales, and private debt. Senior housing is part of a housing sector where we have a significant, under-leveraged portfolio in the U.S. and Canada, supported substantially by agencies. This quarter, we completed one transaction in the U.S. When thinking about capital, consider the variety of options available, and based on those options at any time, we make decisions with a focus on returns, considering the unlevered IRR and long-term perspective. That's our approach to investing capital.

To answer your question about the medical office building, K Street accounts for approximately 20% of our capital allocation to large medical offices this quarter. We are acquiring it for less than half of the replacement cost, with a 6.6% yield at low-80s occupancy. We expect this to yield over 8% upon stabilization, potentially achieving a 9% yield with improved occupancy. Consider the quality of this real estate; it’s just three blocks from the metro station and two blocks from George Washington University Hospital. The parking is top-notch, making it a high-quality asset, and we're securing it with a strong in-place yield and significant upside potential.

Tim, you mentioned that there is still more deleveraging to come. Could you elaborate on that and how we should view the trajectory of that deleveraging?

We have previously discussed two key aspects of returning the balance sheet to the pre-COVID target range of 5.5 to 6 times leverage. The primary focus is on the recovery of NOI back to pre-COVID levels. It's important to clarify that this is not a set goal for where NOI should be, but rather a reference point for where it was. The effects on earnings and leverage will be significant as we aim to achieve that level, and we intend to exceed it in the long run. Our current leverage profile reflects some progress, as our deleveraging from 7.1% last year has begun with the early stages of that NOI recovery. And then, as we've capitalized our external growth pipeline, we've continued to be pretty disciplined about the way that we've capitalized at the equity. So, we've driven down current leverage much faster than if it had just been purely through organic cash flow recovery. So now sitting at 6.3 times leverage this quarter, if you were to layer on kind of just a recovery of NOI back to pre-COVID levels, you'd get down to around 5 times flat. So that's kind of the comment on seeing expectation that if you just take our current capital structure, we knew nothing, and you continue to see NOI recover back to pre-COVID levels, you'll see us get to a leverage level that's well below where we would have been or where we were pre-COVID.

Shankh, I was wondering if you could maybe just talk about the pricing power trends that you're seeing in senior housing and maybe some of the feedback you're getting from the operators vis-a-vis kind of the residents and how you see that pricing maybe trending into the second half of the year. And does that continue into 2024?

Yes, glad to take that. What we're seeing is tremendous strength across the board. The feedback from the operators is very positive. What's going on is people are appreciating that the environment that they have; they're appreciating the social environment, and the demand is strong. And it's quite affordable. Obviously, it's an asset play for the assisted and memory care living. And so the expectation is as to how this plays out. We have nothing that we're seeing that indicates that it's not going to continue with great strength for the foreseeable future. It's a supply-demand situation at one point. And obviously, demand is substantial, and supply is very, very, very limited going forward.

I'll just add one point. Steve, when considering pricing power, the initial phase has been characterized by rising costs. To ensure these communities remain profitable long-term, we will need to increase pricing. As I mentioned in the last call, over the next 12 to 18 months, we will transition from focusing on costs to leveraging pricing power, as we have no capacity left to sell. This transition will happen. It's also important to note that our focus is not on the absolute pricing level but on the difference between revenue per occupied room and expected pricing. That difference is what drives our profit and loss. Keep these points in mind, and you will see our ongoing focus. When we look at our portfolio, on average, it is about half in January compared to the rest of the year. As we renew these leases and market rates continue to rise, we anticipate pricing will remain strong.

Current development pipeline, it looks like it's about 15% outpatient medical office and the balance in senior housing. I guess, as you think about anticipated starts over the next few years, do you see that mix shifting dramatically between those buckets?

If you look at the senior housing area, most of the new capital investment has been focused on wellness rather than on senior housing itself, and I expect that trend to continue. All of our medical office developments have been fully pre-leased, eliminating our exposure to cost risk. While we've seen some fluctuations in different quarters, the projects that have come to fruition this quarter have been in the works for many years, and we don't anticipate any changes moving forward. The current focus in senior housing development is primarily on wellness. Senior housing projects for the senior demographic are challenging to make financially viable today, so we are only interested in pursuing special projects in unique locations, like some of the ones Nikhil mentioned.

If a seniors housing operator wants to use Welltower's platform, what do they need to do? Do they have to sign some kind of exclusive agreement, or will you assist any operator managing your specific assets? Additionally, are there different levels of services you offer operators? For instance, if they have an exclusive agreement, can they fully utilize your platform, whereas if they only manage an asset, do you provide assistance but not grant them complete access to your data?

We're not going to discuss contractual agreements or varying levels of service on this call. Instead, let's focus on the fact that our interests are aligned with our operators. For many years, we've emphasized that the RIDEA 3 and similar structures are about collaboration. There is significant potential for growth in many of these portfolios, benefiting both us and our operating partners. We have various arrangements with different parties, but we won’t delve into those details here. Ultimately, our goals are straightforward: we want to create a positive environment for our residents, improve employee retention and satisfaction, and ensure owner satisfaction. Achieving these objectives will benefit both us and our operating partners.

Shankh, you highlighted a robust investment pipeline with opportunities across all your regions. I know you're return-driven, as you consistently highlight. But given the pricing power you're seeing in IL in Canada or the acceleration in growth you highlighted in the UK heading into 2024, are returns more attractive in those regions today? And are you considering kind of leaning in, I guess, more international versus domestically in the senior housing side?

I wish I could say yes to your question, but the answer is no. Canada has a very competitive market with a small number of owners, a limited number of banks, and a strong CMHC presence. Consequently, returns in Canada typically remain tight. However, we are identifying opportunities to create value through our excellent operating partner in that region. In the UK, we are beginning to see significant returns. We made one investment there this quarter, similar to last quarter, and we are observing positive results. UK returns are indeed good, even very good. However, I must emphasize that the majority of opportunities lie in the U.S. The depth and robustness of the pipeline allow us to select favorable investment spots, enabling us to achieve notable returns, with unlevered IRRs in the senior space today approaching double digits. We are seeing numerous opportunities that offer double-digit returns. Medical office today, IRR opportunities are 8.5% plus, I would say. And obviously, we are very focused on sort of participating debt structures in the SNF side where we can create high-teen returns despite using some debt and some equity-like features that I talked about in probably in the high-teens. So that's kind of our focus. We're purely return driven. We're purely basis driven. And all we are trying to do is we're trying to figure out where can we add value, not through just financial capital, but those four things I talked about. It's an optimization problem, right? It's an optimization problem of location, product, price point, and operator. That's how you make money in this business. And that's how we're trying to create value.

So, just to follow up on your earlier comments on the senior housing pricing power for the rest of '23 and into '24, I think you kind of suggested for us to maybe not focus as much on the absolute price increases at this stage, but just more on the spread between RevPOR versus ExpPOR. I guess really the question is, without giving any specific guidance, can you just give us maybe just a general sense or range of what you might be targeting for the spread between RevPOR versus ExpPOR over the next few years? Is 200 to 300 basis points a reasonable assumption, the trend you've seen over the past several quarters, or should we think more conservatively at this stage when thinking beyond '23?

I was trying to provide additional context to the earlier question. Tim has already shared our perspective on the RevPOR increase, which is currently at 6.3%. My aim was to give more insight into our long-term views. We are concentrating on the difference between RevPOR and ExpPOR. I want to clarify that we are not observing any signs around us suggesting that pricing power is weakening; on the contrary, it remains strong, as John likely pointed out. My main point is that, in the long run, it's less about whether the increase is 6%, 12%, or 3%. The key to accurately projecting our P&L, which is our primary focus, lies in the gap between RevPOR and ExpPOR. We believe we will continue to experience substantial pricing power. Additionally, half of our portfolio is renewed at various points in the anniversary cycle, and street trade continues to rise. I hope this clarifies things.

Regarding the guidance, I want to clarify my understanding. The NAREIT FFO guidance range has decreased, and there are normalized items and expenses being added back to normalized FFO, including transaction costs and promotes, which I know you separate out. I'm trying to grasp what is causing this change. This has been a consistent line item over the past year, right? Should we expect additional transaction costs impacting the P&L for the remainder of the year, even though they are not reflected in your current NAREIT FFO guidance? Thank you.

Thank you, Nick. Regarding the transaction costs mentioned, these primarily consist of non-capitalizable costs that often relate to deals that did not go through. These are difficult to predict as we are an active firm, and we've seen an increase in these costs this quarter. Our underwriting standards have tightened, leading to elevated costs. We've also moved past early-stage development spending in a disciplined way, choosing to forgo certain opportunities. Looking ahead, similar to our approach with acquisition costs, we maintain a flexible strategy regarding investment volumes. If we decide not to proceed with certain initiatives, they may not appear in this expense line. Currently, we haven't made definitive decisions on these, which is why they aren't reflected in this quarter's results.

Just the presentation has sort of highlighted that the outsized occupancy gain was in AL and in other parts of the business. Just a little bit more color on sort of the IL versus AL difference would be helpful because some of the NIC data suggests IL is accelerating. I think you mentioned that as well, would be helpful. And then the follow-up was, post the PLR ruling, just what are the updated thoughts and vision in terms of having an in-house operating platform? And any color on timing, cost would be helpful.

Let me try to take the first one, and John, why don't you take the second one? As I mentioned in my prepared remarks, assisted living continued to significantly outperform independent living. The only thing I was trying to highlight that after underperformance, independent living is starting to pick up, particularly in Canada. And that's what we are seeing starting to come through our Canadian numbers. But if you just look at an absolute performance between the two, there is no question that assisted living has been outperforming. If the economy continues to weaken, on a given rolling 12 to 18-month period, my guess is that it will continue to outperform very significantly, given the need-driven nature of the business.

Yes. Regarding the self-management of PLR, I want everyone to keep in mind, our focus is and always has been on driving results. That is the number one most important thing, whether we're managing directly, whether we're asset managing and our partners are managing is less the point, and it's more about getting the results. So with that said, I think it's probable that we end up in some form of self-management this year. And I would say as far as the costs go, what's happening right now is we're working very quickly on the technology aspect and data analytics aspect of the operating platform. And that really is just swapping out. So, our operators have modules that they're paying for those modules, and now we're switching them to our module. So, that is close to a net zero on the cost side. There are a few other costs as we improve things, which will provide some more clarity going forward. But none of these are really big numbers. So, I wouldn't worry about very big surprises; it's just really changing out and getting improved modules going forward. Hopefully, that's helpful.

Great. I appreciate the follow-up. Just a quick one. I noticed in your investor presentation, I think it's slide 7, last quarter, it said the comp for growth decelerated at 2.6. I know it’s kind of nitpicky, and I didn’t see anything on the slide in the current deck. So, I don’t know, maybe McHugh or someone, if you just clarify if there's that number available. That would be helpful.

Yes, Michael. What we provided is the pool change. One observation you made is that we have seen expenses increase from the fourth quarter to the first quarter. We shared the figure for what the first quarter would have looked like based on the fourth quarter pool, as you noted in the footnote. Regarding the increase in general, the reported same-store numbers from Q4 to Q1 actually reflect our ongoing expansion of the same-store pool. Currently, 95% of our operational properties have been part of the same-store pool for over four quarters, and many of the new transitions came from the UK. In the UK, we have experienced expense growth that is higher than the rest of our portfolio, primarily due to utilities, which we have discussed frequently during this call. Therefore, some of the increase you are noticing in Q1 is attributed to that mix shift and the inclusion of more UK properties.

The UK is in the early stages of normalizing labor costs. The inclusion of the UK makes it appear that the comparison has increased. However, if you examine the same pool for the fourth quarter, you will find that it remained relatively unchanged.

Just a big picture question. Curious if you guys could comment on overall seniors housing penetration. Talking to some of the privates and just reading some of the trade rags, it seems like acuity levels have gone up, and maybe seniors are waiting to come in. Just, I guess, are you seeing that? What does that mean for the business? And what are your thoughts about overall penetration rates and the ability to effectuate that through marketing or what have you as part of this new data-driven platform and efforts?

I'll address the first part of your question. Acuity really peaked in 2020. If it wasn't essential, people avoided the product before the vaccine. We noticed that acuity increased in 2020, but since then, it has started to normalize. I don't agree with the notion that acuity is rising across the entire industry. In fact, someone mentioned Kisco earlier; I spoke with their CEO last week, and they noted that acuity has actually decreased for them. So, while it may have increased for some, it has decreased for others, but I feel that acuity has returned to more normal levels compared to the peak in 2020, particularly with the vaccine rollout.

I'll just add a bit more. The supply-demand situation is very favorable, as we have mentioned numerous times. Regarding penetration, I actually see it increasing. We are observing a strong desire from seniors for a safe and active living environment, coupled with rising care costs. These costs have consistently increased, particularly for home care, which has posed challenges. Consequently, some individuals are choosing to move into our properties because they cannot afford or access the level of care they need. This transition often results in lower overall costs for them, which is an advantage. I anticipate this trend will continue over the next few years, benefiting from the favorable supply-demand conditions. Furthermore, we expect to gain market share through our platform, which will contribute positively as well. Therefore, I foresee a very promising future ahead.

Just two clarifications. Tim, I guess, in your last call, you had mentioned in the guide, you were keeping the temp usage as a percent of total intact or flat through the year in your guide. And with what you've seen in Q1, are you changing that in terms of it being lower? And then second, in the medical office side, I think the OpEx went up maybe 7% or 8%. I'm just wondering, is there anything one-time in that number?

Yes. To address your first question on senior housing, I can confirm that our first quarter results exceeded expectations regarding agency metrics. While some benefits were offset by the addition of full-time employees, we ultimately found ourselves in a more advantageous position for compensation. As mentioned in my guidance outlook, the primary factor influencing our outlook for the year is the improved trend in expenses coming out of Q1. We expect revenue to remain stable, especially as we are entering the months that typically contribute to revenue growth.

And then on the MOB, as I mentioned in my prepared remarks, we're expecting guidance is between 2% and 3%. And so that is a timing issue for Q1, and it will reverse as we go through Q2, Q3, and Q4.